The relationship between shareholders and directors can often be troubled, particularly where there is disagreement on the management and performance of a company. Shareholder activism is growing and as a consequence the boundaries of shareholder capacity to influence directors are being constantly tested.
Directors, subject to the terms of a company's constitution, hold primary responsibility for management decisions and shareholders cannot influence or alter those powers, unless a right exists under the constitution or at law. This means that while shareholders have a significant commercial interest their ability to influence management can often be limited, and may lead to litigation risks and impact on the conduct of general meetings.
ACCR v CBA
A recent example is the case of ACCR v CBA where a series of members' resolutions were proposed for the 2014 AGM, which would require CBA's directors to report on the amount of greenhouse gas emissions the company was responsible for financing.
Key findings of the case
The Court found that
The relationship between shareholders and directors is governed by the extent to which the constitution assigns powers to the directors, and the powers that are vested in the general body of shareholders;
Where (such as in this case) the constitution provided that the business of the company was to be managed by or under the direction of the directors, the shareholders could not usurp the constitution by exerting a supervisory function at general meetings; and
Shareholders are also unable to bring resolutions that expressed an opinion on management decisions, as even non-binding advisory resolutions are likely to be matters dealing with the business and management of the company.
The facts of the case
The Australian Centre for Corporate Responsibility (ACCR) represented over 100 members of the Commonwealth Bank of Australia (CBA) who are entitled to vote at its AGM.
On 4 September 2014, the ACCR under section 249N of the Corporations Act 2001 (Corps Act) put forward a number of proposed resolutions that:
In the opinion of shareholders it was in the best interest of the company for directors to provide a report outlining the quantum of greenhouse emissions that CBA was responsible for financing, the risks to the company from un-burnable carbon and the current approach adopted to mitigate those risks (the First Resolution);
- That shareholders express their concerns as to the absence of a report identifying the level of greenhouse gas emissions CBA was responsible for financing and associated risks (the Second Resolution); and
That each year at about the time of the release of CBA's annual report, the director's report to shareholders on their assessment of the quantum of greenhouse gas emissions CBA was responsible for financing (the Third Resolution). This resolution required amendments to be made to CBA's constitution.
The ACCR preferred option was that the First Resolution be voted on with the Second and Third Resolution suggested as alternatives, if the First Resolution was not found to be appropriate.
On 15 September 2014, CBA published its notice of meeting for the 2014 AGM which included only the third proposed resolution. CBA's ASX notification of the Third Resolution stated that it did not consider the Third Resolution to be in the best interest of shareholders. CBA's notice of meeting also indicated that it did not consider the Third Resolution was within the best interests of the company and recommended members to vote against it.
In correspondence with the ACCR, CBA also expressed the view that the First and Second Resolutions were management matters within the purview of the directors, therefore the resolutions were not capable of being legally effective.
Subsequently, the ACCR:
- Brought proceedings against CBA, seeking an injunction that CBA ensure the First and Second Resolutions were considered or moved at the next AGM and a declaration that the board of CBA had acted outside its powers in commenting and recommending shareholders vote against the Third Resolution.
- Accepted that the directors of CBA were responsible under the constitution for the management of the company, and that shareholders could not direct the exercise of a power that was vested exclusively to the directors under the constitution.
- Contended that the First and Second Resolutions were nonbinding and were expressions of opinion and not an exercise of the company's power and did not purport to compel the CBA board in any particular way. This argument is however difficult to accept given the resolutions directly invoked the directors' fiduciary duty to act in the company's best interests.
The ACCR also criticised previous authority such as National Roads v Parker (Parker) which found that shareholders could not by resolution express an opinion of how powers vested by the company's constitution should be exercised. Alternatively the ACCR argued that the second proposed resolution was an exercise of power that was vested in the company's members at a general meeting by s 250R of the Corps Act.
Decision and analysis
In summary, the court:
- Did not accept the ACCR's criticism of Parker and instead upheld the view that it was no part of the function of members at a general meeting to express an opinion as to how a power vested in the directors should be applied.
- Found that the ACCR's submissions confused the situation where shareholders were requested to ratify directors' decisions. The Court accepted in these cases, an opinion could be expressed however only after the board had sought the view of shareholders on management issues.
- Stated that the only power which vested in shareholders was a power either provided to them under the constitution or one which the Corps Act required to be exercised at a general meeting. No such power provided for shareholders to express opinions on the directors' functions as the First and Second Resolutions proposed.
- Found that the provisions in s 250S which provided that members as a whole could ask questions at an AGM, did not support a wider power for shareholder to bring resolutions expressing opinions on management.
- Rejected ACCR's allegations that the CBA board acted ultra vires, by recommending that members vote against the resolution. The Court concluded the terms of the constitution empowered CBA to make these statements.
All in all, the decision is a win for directors, though it is important to remember that different results may arise particularly where shareholders seek to amend the constitution.